The global economy has entered a state of “high entropy,” defined by disorder, unpredictability and randomness. Risk managers need to adjust to this new, highly volatile world order, via building operational resilience that can withstand whatever challenges these interconnected threats present.
Cristian deRitis
Particularly unsettling is the uncertainty introduced by the evolving U.S. tariff policy. Trade relationships that once were considered sacrosanct are now being re-evaluated, with the future unclear. Interest rates on government bonds, which formerly moved by a few basis points within a month, now shift by tens of basis points within minutes.
Similarly, prices on equities and other assets fluctuate dramatically in response to social media posts or rumors of policy changes. Each of these volatility factors introduces distinct challenges and magnifies the impact of others, necessitating a fundamentally new strategy for managing risk.
The Triple Threat of Volatility
Recent events have dramatically elevated tariff and trade volatility to unprecedented levels. In April 2025, the announcement by the U.S. administration of "reciprocal tariffs" sent shock waves across the world, as the scope and size of tariffs far exceeded even the most pessimistic expectations.
The 10% baseline tariff on imports from all countries, with substantially higher rates for dozens of nations that run trade surpluses with the U.S., is a dramatic increase from the prior levels that businesses had assumed would persist. The announced import taxes on goods from China were particularly punitive, triggering a series of retaliatory measures that will sharply curtail bilateral trade, should they persist.
Tariff uncertainty creates compounding challenges for risk managers. Beyond the direct impact on prices and margins, the second-order effects could be even more disruptive.
Supplier relationships and supply chains built and optimized over decades suddenly require contingency planning. Customer contracts now need to include tariff and renegotiation clauses that once seemed unnecessary. And even inventory management has become a speculative exercise, as tariff announcements can instantly change the economic value of goods in transit or stored in warehouses.
On top of tariff policy, risk managers across industries must contend with interest rate volatility. The gap between market participants' expectations and those of central banks on interest rate policy has widened, causing jarring market swings with each new inflation or unemployment datapoint.
Given this uncertainty, investors are diversifying their portfolios outside the U.S. dollar, affecting the traditional inverted relationship between stock and bond markets. As a result, the yield curve, or the difference in yields across Treasury securities of varying tenors, may no longer convey the clear signal regarding inflation and growth that it did in the past. The increased volatility of duration risk, or the sensitivity of bond prices to changes in interest rates, now requires more active management.
What’s more, the monetary policy landscape requires similar proactive management. The era of slow and steady forward guidance — when central banks could effectively shape market expectations through carefully crafted communications — is fading.
Instead, we've entered a world of data dependency, where each economic release potentially triggers significant policy reassessments and second-guessing by market participants. Monetary authorities' once predictable reaction functions have given way to a more nuanced approach that keeps markets in a permanent state of flux.
The exponential volatility created by the combination of tariffs, interest rates and monetary policy uncertainty creates a “perfect storm” of risk.
A tariff announcement can trigger currency fluctuations as traders reassess relative values. In turn, central banks may respond to changes in the outlook for inflation and growth with policy adjustments, which then feed back into market interest rates. Subsequent movements in bond rates and corporate profits can influence ongoing tariff negotiations, restarting the cycle.
The interconnectedness of these factors means that isolated risk management approaches are doomed to fail.
The Risk Manager's New Playbook
So, how do risk managers navigate this new landscape? The solution lies not in refining old strategies, but in a fundamental rethinking of the risk management function.
Effective risk management now requires a shift from reactive to anticipatory approaches. Waiting for policy announcements before adjusting strategies leaves organizations perpetually behind the curve. Instead, it has become essential to develop "pre-sponse" capabilities — i.e., to prepare for multiple potential outcomes before they materialize. Successful organizations engage in continuous scenario analysis that incorporates not just economic and financial market factors but also varying policy assumptions.
Strategies must also evolve from static to dynamic frameworks. The old approach of setting credit policies or hedging strategies and revisiting them quarterly or semi-annually no longer works in today’s fast-paced environment. Establishing tolerances or thresholds around key performance indicators can empower teams to adjust incrementally as needed, rather than waiting to execute large, costly shifts after significant market moves have already occurred.
The scope of risk management must expand beyond traditional financial risks to encompass policy and regulatory developments as well. Forward-thinking organizations are leveraging external experts or embedding economists with policy expertise directly within risk teams to address emerging risks. This integration allows market and policy signals to feed into a unified risk framework, rather than being analyzed after the fact.
Given the speed and complexity of new events, technology has become a necessity for effective risk management. Real-time risk aggregation systems that can process market movements, policy signals and internal exposures simultaneously can provide the comprehensive view needed for rapid decision-making. Artificial intelligence and machine-learning applications, moreover, are proving useful for identifying non-linear relationships between different risk factors — relationships that traditional models might miss.
Perhaps most importantly, risk managers must become "volatility whisperers"— with a deep-seated understanding of when markets are mispricing risk or when correlations are likely to break down. This skill isn't some mystical gift of the gods but is born from experience and continuous engagement with markets, combined with a dose of humility.
Meticulously calibrated models must be consistently reassessed. To uncover blind spots that quantitative methods might fail to detect, risk managers should ask, "What are we missing?"
Parting Thoughts
The ultimate goal of modern risk management isn't to predict the unpredictable — it's to build organizational resilience that can withstand whatever storms arise. This resilience has both technical and cultural dimensions.
On the technical side, policy monitoring infrastructure is just as important as market monitoring capabilities. Successful organizations allocate dedicated resources to monitor central bank communications, trade negotiations and regulatory developments with the same rigor applied to tracking asset prices and interest rates. They enhance their scenario analysis by explicitly incorporating policy volatility, examining the potential effects of various interest rate trajectories, monetary policy measures and trade developments on their portfolios and strategies.
Culture plays a significant role, too. Organizations that thrive amid volatility embrace what psychologists call "cognitive flexibility" — the ability to adapt thinking and behavior in response to changing circumstances.
Cross-functional collaboration, for example, can dismantle barriers between risk, treasury and business units. Risk appetite frameworks, meanwhile, can be adjusted to accommodate the new volatility regime, recognizing that historical patterns may offer limited guidance for future events.
For risk managers facing the triple challenge of interest rates, asset prices and trade volatility, the path forward requires both philosophical and practical shifts. Philosophically, we must accept that volatility isn't just a transitory disruption but, rather, a permanent feature of the modern economy. The sooner we embrace this reality, the sooner we can develop effective approaches for managing it.
In a world where uncertainty is the only certainty, this evolution of the risk management function isn't just desirable — it's essential.
Cris deRitis is Managing Director and Deputy Chief Economist at Moody's Analytics. As the head of econometric model research and development, he specializes in analyzing current and future economic conditions, scenario design, consumer credit markets and housing. In addition to his published research, Cristian is a co-host of the popular Inside Economics Podcast. He can be reached at cristian.deritis@moodys.com.
Topics: Financial Markets
